Market Equilibrium
Lecture 6
Dr. Jennifer P. Wissink
©2017 John M. Abowd and Jennifer P. Wissink, all rights reserved.
February 13, 2017
i>clicker question (from last week)
Suppose the supply curve in market “Y” is as follows: QS = -15 + 3P. The equation for the
market inverse supply (so the picture we draw) is:
A. QS = -5 + 1/3P.
B. PS = -15 + 3Q.
C. QS = 15 + 1/3P.
D. PS = 5 + 1/3Q.
E. PS = 5 – 1/3Q.
P
Q
Market Equilibrium

We are considering the market for portable
speakers.

Recall that we defined the following for our market:
– The type and style of portable speakers.
– The quality of the portable speakers.
– All other attributes of the generic portable
speaker.
– A time frame that applies to our market for
portable speakers.

Demanders are the buyers and from them we get
the demand function, etc.
– QxD = f(PX, Ps, Pc, I, T&P, Pop)

Suppliers are the sellers and from them we get the
supply function, etc.
– QXS = g(PX, Pfop, Poc, S&T, N)

The market is a perfectly competitive market.
Market Equilibrium (Verbal)
A
place of “rest”.
 Equilibrium: a price where the quantity demanded
equals the quantity supplied.
 In notation:
– Find a PX* so that at PX*: QXD = QXS
or
– Find a PX* so that: QXD(PX*) = QXS(PX*)
Market Equilibrium (Table)
Price
0
5
10
15
17
20
25
30
35
40
Market Equilibrium
Quantity
Quantity
Demanded
Supplied
40
6
35
11
30
16
25
21
23
23
20
26
15
31
10
36
5
41
0
46
 At
P* = $17, the
QD = QS=23
 So
Q*=23
Market Equilibrium (Graph)


The market
equilibrium occurs
at the intersection
of the supply and
demand curves.
Price
Demand
Supply
Let’s drop the
subscript X, ok?
17


At P* = $17,
QD = QS = 23
So Q* = 23
23
Quantity
Market Equilibrium (Equations)

Two equations and Two unknowns
– Equations: Demand and Supply Curves
– Unknowns: P and Q

To find P*, set QD = QS
–
–
–
–
–
Recall: QD = 40 - P and QS = 6 + P
So for an equilibrium: (40 - P*) = (6 + P*)
34 = 2P* or P* = 34/2 so... P*=$17
To find Q*, plug P* into either the demand or supply equation.
Q*=23 = 40 - 17 or Q*=23 = 6 + 17
i>clicker question
Suppose the winter demand and supply curves in the market for earmuffs are as follows:
QD = 40 – 4P and PS = 1 + 1/2Q. Which one is true?
A. Q*=7 and P*=12
B. Q*=12 and P*=7
C. Q*=7/12 and P*=12/7
D. Q*=7 and P*=7
E. none of the above is true
Now What?
Comparative Statics!



SIMPLE AS THAT!? Then what....
Use the model to make predictions.
Something changes in the market.
–
–
–
–



Something that changes Demand.
Something that changes Supply.
Something that changes both!
Something the government does to prevent an equilibrium.
Would get a new equilibrium.
Compare one market equilibrium with another market
equilibrium and see what happens to
P* and Q*.
Compare two equilibriums - compare two static situations
- comparative statics!
The Ivanka Trump Brand Products
Market

What impact will the following type of story have on Ivanka Trump
branded products?
–
–

Kellyanne Conway Promotes Ivanka Trump Brand, Raising Ethics Concerns
https://www.nytimes.com/2017/02/09/us/politics/kellyanne-conway-ivanka-trump-ethics.html
What do you predict will happen to the equilibrium market price and
quantity?
Comparative Statics:
Demand….

Price
Demand0
Supply0
P*o
Q*o
Quantity
The Apple Market

5 facts about this year's apple harvest, plus a challenge
– http://www.nyapplecountry.com/press-room/press-releases/204-5-facts-aboutthis-year-s-apple-harvest-plus-a-challenge
– #1: In spite of weather challenges – frost during bloom in some areas, hail in
others – is the state’s growers are forecast to pick 30 million cartons of
apples. That’s slightly above the state’s average crop of 28.6 million cartons
over the past five years. “We really are the Big Apple – we are the largest
apple-producing state East of the Mississippi, and second only to Washington
state nationally,” says Allen.

What do you predict will happen to the equilibrium market price
and quantity?
Comparative Statics:
An Increase in Supply 
Price
Demand0
Supply0
P*o
Q*o
Quantity
i>clicker question
Suppose the following two events simultaneously occur in the “tennis ball” market: 1) there is a fall in the
wages of workers who make the balls 2) the fabulousness of Roger Federer at the Australian Open
increases interest in youth tennis. At the new market equilibrium we predict
A.
B.
C.
D.
E.
both P* and Q* must fall.
both P* and Q* must rise.
P* must fall and Q* must rise.
Q* must fall and P* must rise.
Q* must rise and P* can either rise, fall or stay the same.
Price
Supply0
Demand0
P*o
Q*o
Quantity
Comparative Statics Summary:
Can You Fill This In?


The demand curve
– QD = f(P)
given Ps, Pc, I,
T&P, Pop
The supply curve
– QS = g(P)
given Pfop, Poc,
S&T, N
EVENT
↑D
↓D
↑S
↓S

Comparative Statics
Summary:
↑D ↑S
etc...
P*
Q*
3 Classic Government Interventions
 Price
Floors
 Price Ceilings
 Quantity Quotas
Ambrogio Lorenzetti, The Effects of Good
Government in the city, Siena Italy, circa 1338
Price Floors
 Government
established minimum selling price.
– Floor must be above P* to be binding.
– Why? Government usually thinks the market price is
too low for some reason.
 Usually
end up with….
– Surpluses!
– And all the problems they create.
 Examples:
– supported milk prices
– minimum wage laws
Price Floors & Market Surplus

Equilibrium is
at P*=17 and Q*=23.

Pfloor = $25.

At the artificially high
price of $25, sellers want
to sell 31.

But buyers only want to
buy 15.

There is a surplus of 16.
Price
Demand
Supply
Surplus = 16
25
17
15
23
31
Quantity
Price Ceilings

Government established maximum
selling price.
– Must be below P* to be binding.
– Why? Government usually thinks the
market price is too high for some reason.

Usually end up with….
– Shortages!
– And all the problems they generate.

Examples:
– Gas price ceilings
– Apartment rent control
Price Ceilings & Market Shortage

Equilibrium is at
P*=17 and Q*=23.

Pceiling=$10.

At the artificially low
price of $10, buyers
want to buy 30.

But sellers only want
to sell 16.
Price
Demand
Supply
17
10

There is a shortage
of 14.
Shortage = 14
16
23
30
Quantity
Quantity Quotas
 Government
established maximum number
of units sold.
– Qmax must be below Q* to be binding.
– Why? Government thinks too many units are
being traded.
– Example: import restrictions
 Usually end up with...
– Higher prices and more.
Quantity Quotas
P
P
D
D
S
S
Q
Q
Final Comments